Problem 9-2 Scenario Analysis We are evaluating a project that costs $670,000, h

Question

Problem 9-2 Scenario Analysis We are evaluating a project that costs $670,000, has a tive-year life, and has no salvage value. Assume that depreciation is straight- line to zero over the life of the project. Sales are projected at 59,000 units per year. Price per unit is $44 varlable cost per unit is $24 and fixed costs are $760,000 per year. The tax rate is 35 percent, and we requtre a return of 18 percent on this project. Suppose the projections given for pnce, quantity, variable costs, and fixed costs are all accurate to within 10 percent Calculate the best-case and worst-case NPV tigures. (A negetive enswer should be indicated by a minus sign. Do not round Intermediete colculetions and round your answers to 2 decimal places e.9 3316 NPV Best-case Worst-case Next ?M

Explanation / Answer

Annual Depreciation = $670,000 / 5 = $134,000

Worst-Case, $

(-10%)

Best-Case, $

(+10%)

2,102,760

(=$39.6 x 53,100)

2,596,000

(=$44 x 59,000)

3,141,160

(=$48.4 x 64,900)

1,146,960

(=$21.6 x 53,100)

1,416,000

(=$24 x 59,000)

1,713,360

(=$26.4 x 64,900)

134,000

48,230

100,100   

Npv = Pv of Cash Inflows - Pv of Cash Outflows

NPVworst-case = $223,570 / 1.181 + $223,570 / 1.182 + $223,570 / 1.183 +

$223,570 / 1.184 + $223,570 / 1.185 - $670,000

= $189,466.10 + $160,564.49 + $136,071.60 + $115,314.92 + $97,724.51 - $670,000

= $29,141.63

NPVbest-case = $431,570/ 1.181 + $431,570/ 1.182 + $431,570/ 1.183 + $431,570/ 1.184 +

$431,570/ 1.185 - $670,000

= $365,737.29 + $309,946.85 + $262,666.83 + $222,599 + $188,643.22 - $670,000

= $679,593.20

Particulars

Worst-Case, $

(-10%)

Base Case, $

Best-Case, $

(+10%)

Sales

2,102,760

(=$39.6 x 53,100)

2,596,000

(=$44 x 59,000)

3,141,160

(=$48.4 x 64,900)

Less: Variable Costs

1,146,960

(=$21.6 x 53,100)

1,416,000

(=$24 x 59,000)

1,713,360

(=$26.4 x 64,900)

Less: Fixed Costs 684,000 760,000 836,000 EBITDA 271,800 420,000 591,800 Less: Depreciation 134,000

134,000

134,000 EBT 137,800 286,000 457,800

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